‘Purchasing Dealer Cannot, Without Credit In His Account, Claim Input Tax Credit If Selling Dealer Fails To Comply With The Statutory Requirement': Patna High Court

The division bench comprising Chief Justice K. Vinod Chandran and Justice Partha Sarthy, observed, “When the supplier fails to comply with the statutory requirement, the purchasing dealer cannot, without credit in his account claim Input Tax Credit and the remedy available to the purchasing dealer is only to proceed for recovery against the seller. Even if such recovery from the supplier is effected by the purchasing dealer; the State would be able to recover the tax amount collected and not paid to the exchequer, from the selling dealer since the rigor of the provisions for recovery on failure to pay up, after collecting tax, enables the Government so to do.”

FACTS

In accordance with the factual context of the case, M/s. Aastha Enterprises, the Petitioner, engaged in the purchase of goods from a supplier and duly remitted the applicable value of the goods along with the corresponding tax amount to the supplier. Regrettably, the supplier failed to remit the tax amount to the government as required.

The Petitioner sought to avail the Input Tax Credit (ITC) associated with the aforementioned tax payment. Their rationale was that since they had indeed paid the tax to the supplier, they should rightfully be entitled to claim the ITC. However, the Revenue Department issued an assessment order on May 25, 2022, rejecting the Petitioner's ITC claim. The rationale behind this denial was anchored in the assertion that the Petitioner had not adhered to the conditions outlined in section 16(2) of the Central Goods and Services Tax Act, 2017. Consequently, the department contended that the Petitioner was ineligible for the credit in question.

In response, the Petitioner lodged a writ petition before the Patna High Court, challenging the assessment order. Their central argument revolved around the notion that disallowing the credit, despite the Petitioner having fulfilled their tax obligations and claimed the ITC based on legitimate tax invoices from the supplier, was unjust.

They bolstered their stance by referring to a judgment by the Madras High Court in the case of Sri Vinayaga Agencies v. The Assistant Commissioner [WP Nos. 2036 to 2038 of 2013], as well as the case of M/s D.Y Beathel Enterprises v. The State Tax Officer [(Data Cell). These precedents were cited to underscore the potential for double taxation if proceedings were to be pursued against the Petitioner, who had already settled the tax amount.

ISSUE

Whether a purchasing dealer can be denied the benefit of ITC in cases where the supplier has collected tax but not paid it to the government?

COURT’S VERDICT

The Court's verdict underscored the significance of Input Tax Credit within the nationwide tax framework, aiming to prevent the accumulation of taxes. The Court also noted that the advantage of such credit, accessible to a buyer who sells or manufactures goods using materials with paid taxes, is a concession established by the law, as previously established in the case of ALD Automobile Private Limited.

The Court emphasized the necessity of adhering to the stipulated conditions for claiming this credit. Failing to do so would result in the denial of benefits, as the credit's availability is hinged upon statutory compliance. The Court clarified that this benefit is rooted in the law, and if the conditions outlined in the statute are not met, the claimant cannot receive the benefit.

The argument against double taxation did not hold sway with the Court, particularly since denial of the claim occurs only when the tax-collecting supplier neglects remitting the tax to the Government. The Court asserted that taxation is an obligatory contribution for public welfare, and without transmitting the levy to the Government, the taxpayer's liability to tax isn't fulfilled, precluding any concern about double taxation.

Addressing the assessee's contention about the statutory provisions for recovering unremitted collected tax, the Court ruled that the mere existence of recovery mechanisms does not absolve the taxpayer's responsibility to settle the total liability to the Government.

The Court clarified that a purchasing dealer eligible for Input Tax Credit can only avail the benefit if the tax-collecting supplier has indeed paid the tax to the Government. The term 'Input Tax Credit' implies a scenario where the purchasing dealer holds a credit in their ledger account with the Government, contingent on the supplier's tax payment.

The court said, “The purchasing dealer being the person who claims Input Tax Credit could only claim the Input Tax benefit if the supplier who collected the tax from the purchaser has paid it to the Government and not otherwise. The Government definitely could use its machinery to recover the amounts from the selling dealer and if such amounts are recovered at a later point of time, the purchasing dealer who paid the tax to its supplier could possibly seek for refund.”

“However, as long as the tax paid by the purchaser to the supplier, is not paid up to the Government by the supplier; the purchaser cannot raise a claim of Input Tax Credit under the statute. We have to notice that the word ‘Input Tax Credit’ itself postulates a situation where the purchasing dealer has a credit in the ledger account maintained by it with the Government. The said credit can only arise when the supplier pays up the tax collected from the purchaser,” the Court added.

The Court emphasized that possessing a tax invoice, proving the goods' movement, confirming the transaction's financial aspect through bank records—these elements alone do not qualify for Input Tax Credit. The credit must be present in the purchasing dealer's ledger account.

The Court highlighted the independent contractual relationship between the seller and the purchaser, which does not involve the Government. However, the statutory framework dictates that while the seller can collect tax, they are also obligated to remit it to the State.

The Court expounded that both the statutory tax levy and the benefit of Input Tax Credit are dependent not just on collection by the seller but also on timely payment to the Government. Consequently, if the supplier fails to meet this obligation, the purchasing dealer cannot claim Input Tax Credit unless there's credit in their account.

The Court stressed, “The statutory levy and the further benefit of Input Tax Credit conferred on the purchasing dealer depends not only upon the collection by the seller but also the due payment by the seller to the Government.”

“It is clear that the literal nomenclature and the statutory language, mandates that there should be credit available in the credit ledger of the purchaser to claim Input Tax and otherwise the claim would be frustrated,” the Court further stressed.

“On the above reasoning, we have to find that the claim of Input Tax Credit raised by the petitioner cannot be sustained when the supplying/selling dealer has not paid up the amounts to the Government; despite collection of tax from the purchasing dealer,” the court said while dismissing the writ petition.